JM Financial is bullish on IndusInd Bank has recommended buy rating on the stock with a target price of Rs 1650 in its research report dated September 11, 2017.
JM Financial's research report on IndusInd Bank
IndusInd Bank (IIB) announced that it has commenced exclusivity talks with Bharat Financial (BHAFIN) to consider an appropriate structure for merger or collaboration. While media reports indicate that the deal has been in the works for long, IIB has nudged ahead of other suitors for BHAFIN. Final details on the structure and swap ratio have not been announced yet. Assuming a premium of 10% on BHAFIN’s CMP (As on 8 th Sep ’17 ) , the swap ratio amounts to 1 share of IIB against 1.65 shares of BHAFIN and a dilution of 14% for IIB’s current shareholders . As both companies trade close to 3.7 - 3.8x FY19E P/BV, the impact on the merged BVPS would be less than 4% even in case of a 20% premium for BHAFIN. Also , BHAFIN ’s high capital adequacy and the retail nature of MFI loans ( 75% risk weights on MFI loans ) will accrue c . 90bps to the merged IIB’s Tier - 1 ratio. ROA impact (+15 - 25bps) and potential NIM impact are highly positive for IIB. Overall, we believe the deal provides significant opportunities for IIB to tap into a large, underserved customer base. While IIB currently trades at 3.7x FY19E BVPS, we await further clarification on the deal structure and pricing for revisions to our estimates.
As per Bloomberg estimates, both IIB and BHAFIN trade at 3.7 - 3.8x FY19E P/BV. Hence, the impact on merged BVPS for IIB will be negligible (<4%). Assuming scenarios ranging from 0 % to 20% premium being paid for BHAFIN, IIB shareholders will face dilution in the 12.7% - 15.3% range. Overall, the move on merger talks is positive for both the entities as the union of a profitable micro - lender and a universal bank is accretive to both entities’ shareholders. While IIB currently trades at 3.7x FY19E BVPS, we await further clarification on the deal structure and pricing for revisions to our estimates.
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